Investment thesis

Welcome to Orchid’s Silver weekly report, in which we wish to deliver our regular thoughts on the silver market through the Aberdeen Standard Physical Silver Shares ETF (SIVR).

SIVR has recently exceeded its 2019 high of $19.03 per share, corroborating our view that there is a strong bull run in the silver market.

Like gold, silver has benefited from a very favorable macro environment, reflected in the steep decline in the dollar and short-term US real interest rates.

Both speculators and ETF investors have recently boosted significantly their net long exposure to silver, highlighting a very strong sentiment.

We expect investment demand for silver to remain robust in the months ahead because silver has still plenty of catch-up to play against gold, despite this year’s expected contraction in industrial usage.

Our 3-month moving target for SIVR is at $20 per share.

Source: Trading View, Orchid Research

About SIVR

SIVR is an ETF product using a physically backed methodology. This means that SIVR holds physical silver bars in HSBC vaults.

The physically-backed methodology prevents investors from getting punished by the contango structure of the Comex silver forward curve (forward>spot), contrary to a futures contract-based methodology.

For long-term investors, SIVR seems better than its competitor SLV, principally because its expense ratio is lower (0.30% for SIVR vs. 0.50% for SLV), which is key to make profit over the long term.

Speculative positioning

Source: CFTC, Orchid Research

The speculative community boosted significantly its net long position in COMEX silver in the week to July 14, according to the CFTC. This comes after four weeks of moderate buying.

This confirms our view that a positive swing in sentiment has emerged in favor of COMEX silver since May, which is the result of a very friendly positive environment.

Like gold, silver tends to be greatly influenced by the fluctuations in the dollar and US real rates. Because the dollar depreciates and short-term US real rates move lower, speculators are inclined to assert more upside exposure to COMEX silver.

READ ALSO  Savings market ‘in slow and steady recovery after hitting record lows in August’

Implications for SIVR: There is plenty of room for additional spec buying for COMEX silver in the months ahead due to the fairly light spec positioning in the silver futures market. This positive for the COMEX silver spot price thus SIVR.

Investment positioning

Source: Orchid Research

ETF investors bought silver at a strong rate of 325 tonnes in the week to July 17, according to our estimates. This was the 18th straight week of ETF buying.

ETF inflows into silver have increased at an accelerating pace since April, highlighting a strongly positive sentiment toward the precious metal. Silver ETF holdings have jumped by 7,500 tonnes or 35% in the year to date, representing a significant amount of silver (more than half of annual supply).

We think that these substantial inflows reflect greater participation of retail investors in the silver market and a still relatively low silver price vs gold. The gold-silver ratio has declined well since April, yet it remains elevated judging by historical standards.

Source: Bloomberg, Orchid Research

Implications for SIVR: We expect inflows into silver ETFs to continue in the months ahead until the gold:silver ratio adjusts toward a level in line with its historical standards. This should act as a positive force for the COMEX silver spot price and thus SIVR.

Silver industrial demand contracted further in April

In this section, we discuss the latest estimates about industrial production released by the CPB Netherlands Bureau for Economic Policy Analysis (CPB). As a reminder, industrial demand for silver accounts for roughly half of the total silver demand. China accounts for nearly 20% of industrial silver demand.

According to the CBP, the contraction in global industrial production contracted further in April, resulting in a decline of 6.2% YoY over January-April 2020, vs a decline of 4.3% YoY in Q1.

Source: CPB, Orchid Research

The largest contraction is in the Euro Area (-11.8% YoY in the first four months of the year, followed by Latin America (-9.6% YoY in January-April), two regions badly hit by the COVID-19 crisis.

READ ALSO  SE: Intel Agrees to Sell Storage Unit to SK Hynix for $9 Billion

The contraction is relatively more severe in advanced economies (-7.4% YoY) than in emerging economies (-5.1% YoY) so far this year.

Implications for SIVR: The large contraction in industrial production in the first four months of the year is likely to be accompanied by a significant contraction in industrial usage for silver. However, the contraction has been more than offset by the massive rise in investment demand for silver, pushing silver prices higher. As a result, we think that the uptrend in SIVR could prevail for longer.

Our closing thoughts

SIVR has exceeded its last year high, boosting our conviction that a bull run in the silver market is well alive.

We expect silver prices to continue to play catch-up against gold prices in the months ahead, which should, therefore, normalize the gold-silver ratio to a more normal level judging by historical standards.

Investment demand is expected to continue to increase in the near term as a result of the very friendly macro environment for gold and silver, which is reflected in the decline in the dollar and US real rates.

Even though industrial demand for silver should contract noticeably this year, investment demand should increase sufficiently to more than offset the contraction in the industrial sector.

As such, we expect the uptrend in SIVR to continue until the end of the year, setting a 3-month price target of $20 per share.

Did you like this?

Click the “Follow” button at the top of the article to receive notifications.

Source: CPB, Orchid Research

The largest contraction is in the Euro Area (-11.8% YoY in the first four months of the year, followed by Latin America (-9.6% YoY in January-April), two regions badly hit by the COVID-19 crisis.

The contraction is relatively more severe in advanced economies (-7.4% YoY) than in emerging economies (-5.1% YoY) so far this year.

READ ALSO  Trump Announces Sudan's Removal From Terror List, Paving Way For Israel Peace Deal

Implications for SIVR: The large contraction in industrial production in the first four months of the year is likely to be accompanied by a significant contraction in industrial usage for silver. However, the contraction has been more than offset by the massive rise in investment demand for silver, pushing silver prices higher. As a result, we think that the uptrend in SIVR could prevail for longer.

Our closing thoughts

SIVR has exceeded its last year high, boosting our conviction that a bull run in the silver market is well alive.

We expect silver prices to continue to play catch-up against gold prices in the months ahead, which should, therefore, normalize the gold-silver ratio to a more normal level judging by historical standards.

Investment demand is expected to continue to increase in the near term as a result of the very friendly macro environment for gold and silver, which is reflected in the decline in the dollar and US real rates.

Even though industrial demand for silver should contract noticeably this year, investment demand should increase sufficiently to more than offset the contraction.

As such, we expect the uptrend in SIVR to continue until the end of the year, setting a 3-month price target of $20 per share.

Did you like this?

Click the “Follow” button at the top of the article to receive notifications.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.



Via SeekingAlpha.com